It’s important to always ensure that you are ready to face life’s challenges. One way to do this is by having an emergency fund that will buffer you against unforeseen circumstances. It’s the vicious cycle of life that rainy days will come and you must be prepared for any such times. On average, less than 40% of people have some form of emergency funds in place. With an economy like ours, it’s very dangerous to not have one because you’ll be dragged into debt once disaster strikes. People get retrenched, medical emergencies happen; costs of good services can surge on short notice and more. Let’s look at things to consider in your pursuit to build an emergency fund.
It’s About Expenses
In this article, I’m working with the assumption that you already have a funeral policy and a medical policy. However, even if you don’t, the principles are still more or less the same. It’s generally indicated that the thing to consider when determining how much to put in an emergency fund is your basic monthly expenses. We are talking about things like groceries, housing, transportation and other basic utilities. So there isn’t a fixed answer with regards to how much you should put in an emergency fund. Principally, the several submissions put forward by most experts show that on average you should have an emergency fund that is equivalent to between 3 and 6 months’ worth basic expenses. Ideally, it’s more expedient to even increase that as more is always better. The idea is to ensure that in the event of a job loss, for instance, you’ll be able to keep standing whilst you explore other avenues.
What Are Your Financial Obligations?
If you are a family person, a sole earner or have dependents then it’s even advised to stretch your target to as much as a year’s worth of expenses. Suppose you have kids that go to school, that would require you to factor in expenses related to their upkeep. So bear in mind that the target you set to place in your emergency fund must be premised on your current financial obligations. Many parents are struggling with debts incurred from borrowing to pay for school fees and the like. This is all borne from having neglected the importance of having considerable emergency funds due to their dependents.
More Is Better (But Be Wary)
Logically anyone would want to put in as much as possible into the fund, which is commendable. However, it’s possible to get to a point where you over-fund your emergency fund and money just ends up lying idle. Depending on some scenarios over-funding can actually result in you incurring losses without even noticing it. For instance, inflation and the missed prospects of earning returns by investing can constitute losses if the money is just idle. My advice would be for you to make honest assessments about your life patterns and consider making short-term investments of some of the saved up money.
Can You Invest?
Investing can be a good move provided your fund has grown so big without you encountering any huge emergencies. Thus you’ll somewhat have the freedom to take out part of it and invest – only short-term investments though.
Approaches To Building The Fund
Find ways to make the saving process passive and automatic so as to institute safeguards against indiscipline. For instance, you can make arrangements for a portion of any income you get to be redirected somewhere before you even handle it. Don’t make that portion an actual amount per se; rather make it a percentage so that you create a build-up of anticipation of wanting to find out after a while how much is now in the fund. This motivates you to consistently save. Suppose you say 5% of any income you get goes to the emergency fund. You’ll, of course, need a trustworthy person to handle the redirects for you.
Not Easily But Readily Accessible
I know that sounds oxymoronic but here is what I’m driving at. For saving to work and the fund to grow, the money mustn’t be so easy for you to access so as to drown temptation. Conversely, it should also be readily available if an actual emergency arises. This would need you to be accountable to a trustworthy person again. Building an emergency fund can be very difficult if you aren’t accountable to anyone.
Windfalls are strategic in that they are unexpected incomes that you can get from time to time. The mere fact that this wasn’t expected and wasn’t accounted for means the wisest thing to do would be to channel it towards the emergency fund. Often times people carelessly squander windfalls without realizing that they can serve a greater purpose in times of need.
Creating emergency funds takes discipline, goal-orientation and long-term projections. Due to the current economic challenges, people face I know the obvious excuse of not having enough to save anything comes up. The sad reality though is that the costs of not having an emergency fund far outweigh the cost of having one. Therefore it’s advisable for anyone to have an emergency fund. Even if it’s not much but having an extra amount of money that you set aside brings you a step closer to being adequately ready for emergencies. So don’t completely ignore the idea of an emergency fund – start setting aside something today.